3.2 Business Growth

Question 1

Reasons to grow 4

Answer 1

shareholders want higher market share and profitability
to benefit from economies of scale
larger firms have easier access to finance
monopoly power over consumers and suppliers

Question 2

Types of economies of scale

Answer 2

Financial
Managerial
Technical
Marketing
Purchasing
Risk bearing

Question 3

Financial economies of scale

Answer 3

larger firms often receive lower interest rates as they are seen as less risky

Question 4

managerial economies of scale

Answer 4

larger firms can employ higher skilled workers-> increased efficiency-> lower unit costs

Question 5

Marketing economies of scale

Answer 5

larger firms can spread cost of advertising over a larger number of sales -> lower costs

Question 6

Purchasing economies of scale

Answer 6

large firms order in bulk with discount which lowers AC

Question 7

risk bearing economies of scale

Answer 7

larger firms can spread risk over a larger number of products through diversification

Question 8

Problem arising from growth

Answer 8

Diseconomies of scale
Internal communication
Overtrading

Question 9

Merger vs Takeover

Answer 9

Merger is when two or more firms combine to form a new one
Takeover is when one firm buys another

Question 10

Vertical integration definition, pros and cons

Answer 10

Taking over a firm in front or behind in the production process

P- reduces cost of production as no middleman profits
- greater control over supply chain

C- diseconomies of scale
-culture clash
-little expertise

Question 11

Horizontal integration definition, pros and cons

Answer 11

Taking over of a firm at the same stage of the production process

P-rapid increase of market share
-economies of scale reduce unit costs
-reduces competition-> can increase prices
-new expertise and knowledge

C- diseconomies of scale
-clash of cultures

Question 12

Financial reward of a merger

Answer 12

increased market share
diversification
access to new markets
increased value

Question 13

Pros of organic growth

Answer 13

pace is manageable
less risky as growth is financed by profits
avoids diseconomies of scale
management know all parts of the business

Question 14

Cons of organic growth

Answer 14

pace can be slow and frustrating
access to finance is limited
may not benefit from economies of scale

Question 15

Ansoff matrix

Answer 15

Existing product Existing market- market penetration

Existing product New product- market development

New product existing market- product development

New product new market- diversification